INTERLINK ELECTRONICS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.These forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. Overview Interlink Electronics, Inc. (“we”, “us”, “our”, “Interlink” or the “Company”) designs, develops, manufactures and sells a range of force-sensing technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard products and custom solutions. These include sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs. Our Human Machine Interface (“HMI”) technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical. The application of our HMI technology platforms includes vehicle entry, vehicle multi-media control interface, rugged touch controls, presence detection, collision detection, speed and torque controls, biological monitoring and others. Interlink has been a leader in the printed electronics industry for over 30 years with the commercialization of our patented Force-Sensing Resistor (“FSR®”) technology that has enabled rugged and reliable HMI solutions. Our solutions have focused on handheld user input, menu navigation, cursor control, and other intuitive interface technologies for the world’s top electronics manufacturers. We invented FSR® technology and pioneered commercialization of printed electronics manufacturing, paving the way for industry-wide adoption of force sensing technology. Our extensive knowledge and experience with this technology, along with the firmware we incorporate in our HMI solutions, differentiates us from other providers of HMI solutions. We, along with our customers, incorporate our FSR and force sensing sensors and modules into end user products. Our sensors and modules are used in electronics devices and systems where user input must be converted into useful output data. Our force sensing technology solution platforms enabled industry-first implementations in gaming, smartphone, rugged notebook, automotive cockpit and automotive entry applications. Consumer and end-user demand for enhanced user experience is driving the need for innovative multi-modal HMI technologies and applications. Force sensing input provides a critical novel modality that drives a paradigm shift in HMI. Market requirements for innovative solutions that enable smaller, thinner devices, lower power consumption, highly refined designs, better navigation and more intuitive usability in all environments, are also driving increased demand for our products. Industry is moving towards the use of multi-modal HMI in the home, industrial, medical and automotive spaces. Interlink delivers cutting edge, high performance HMI solutions for customers who wish to replace outdated switches and knobs in these environments. 18 Significant market opportunities are rapidly emerging for us to improve upon the functionality of standard capacitive sensors which are widely available and competitively priced. Inadvertent activation, where users unintentionally activate a control, is a common problem with capacitive technology. In contrast, force sensing solutions require a deliberate application of force to operate. We have had recent success in using our force sensing solutions in combination with capacitive technologies to minimize the latter’s performance issues, enabling force sensing solutions to complement competitive technologies and provide hybrid solutions and open up new opportunities for growth. We continue to simultaneously expand our standard product portfolio and develop new technology platforms to grow existing markets and capture emerging markets. This portfolio expansion will incorporate other complimentary sensing technologies. This broader portfolio of technologies will allow us to use our expertise in integrating multiple sensing technologies for applications in the rapidly growing Internet-of-Things (“IoT”). Interlink serves our world-wide customer base from our corporate headquarters in Irvine, California (Orange County area) and from our facility in Camarillo, California (Ventura County). We plan to establish a Global Product Development and Materials Science Center in our existing Camarillo footprint, which we expect to be operational in May 2021. This facility will have a state-of-the-art printed electronics development laboratory as well as materials science lab. Our engineering team will be based in this center where we will work with our U.S. and global customers on developing, engineering, prototyping and implementing our advanced HMI solutions. We also maintain a small embedded software and IoT application development center in Singapore. We manufacture all our products in our printed electronics manufacturing facility in Shenzhen, China, which has been in operation since 2006. In addition, we maintain a global distribution and logistics center in Hong Kong, a technical sales office in Japan, and several manufacturer representatives and distributors in strategic locations in our key markets, all of which allows us to support our global customer base. We sell our products in a wide range of markets, including consumer electronics, automotive, industrial and medical. Our customers are some of the world’s largest companies and most recognizable brands. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected. A description of our critical accounting policies that represent the more significant judgments and estimates used in the preparation of our financial statements was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2021. There have been no changes to our critical accounting policies and estimates described in the Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes. Recently Issued and Adopted Accounting Pronouncements Recent accounting pronouncements are detailed in Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 19 Results of Operations The following table sets forth certain unaudited condensed consolidated statements of income data for the periods indicated. The percentages in the table are based on net revenues. Three months ended March 31, 2021 2020 $ % $ % (in thousands, except percentages) Revenue, net $ 1,568 100.0 % $ 1,691 100.0 % Cost of revenue 694 44.3 % 732 43.3 % Gross profit 874 55.7 % 959 56.7 % Operating expenses: Engineering, research and development 217 13.8 % 285 16.9 % Selling, general and administrative 717 45.7 % 746 44.1 % Total operating expenses 934 59.6 % 1,031 61.0 % Income (loss) from operations (60 ) (3.8 )% (72 ) (4.3 )% Other income (expense): Other income (expense), net 10 0.6 % 6 0.4 % Income (loss) before income taxes (50 ) (3.2 )% (66 ) (3.9 )% Income tax expense (benefit) (7 ) (0.4 )% (48 ) (2.8 )% Net income (loss) $ (43 ) (2.7 )% $ (18 ) (1.1 )% Comparison of Three Months Ended March 31, 2021 and 2020 Revenue, net by the markets we serve is as follows: Three months ended March 31, 2021 2020 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Industrial $ 538 34.3 % $ 392 23.2 % $ 146 37.2 % Medical 43 2.7 % 404 23.9 % (361 ) (89.4 )% Consumer 449 28.6 % 187 11.1 % 262 140.1 % Standard 538 34.3 % 708 41.8 % (170 ) (24.0 )% Revenue, net $ 1,568 100.0 % $ 1,691 100.0 % $ (123 ) (7.3 )% We sell our custom products into the industrial, medical and consumer markets. We previously sold custom products in the automotive market and continue to pursue opportunities in that sector. We sell our standard products through various distribution networks. The ultimate customer for standard products may come from different markets which are often unknown to us at the time of sale. Each market has different product design cycles. Products with longer design cycles often have much longer product life-cycles. Industrial and medical products generally have longer design and life-cycles than consumer products. We currently have products with life-cycles that have exceeded twenty years and are ongoing. Revenues were up in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 in the industrial and consumer markets, and were down in the medical markets and for our standard products. The increase in revenue from our industrial market customers is due to increased purchasing volume by these customers for use in their ongoing product lines resulting from changes in demand by their customers. The increase in revenue from our consumer market customers is due to an increase in purchase levels on corresponding products and programs. The decrease in revenue from our medical market customers is primarily due to significant reduction of shipments to our largest medical customer, which is subject to delays in installing devices that use our products in hospitals due to COVID-19 restrictions. The decrease in revenue on our standard products is due to cyclical purchasing pattern of some of our larger customers who took delivery of bulk quantities during 2020. In the normal cycle, some of our larger customers purchase in bulk quantities and absorption of these products can straddle several financial reporting periods. In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods during the year to coincide with their project and building plans. 20 Three months ended March 31, 2021 2020 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Gross profit $ 874 55.7 % $ 959 56.7 % $ (85 ) (8.9 )% Our gross profit and gross margin percentage are impacted by various factors including product mix, customer mix, volume, material costs, manufacturing efficiencies, facilities costs, compensation costs and provisions for excess and obsolete inventories. The decrease in gross profit for the three months ended March 31, 2021 as compared with the prior year was due to the decrease in revenues, while gross margin percentage was substantially unchanged. Three months ended March 31, 2021 2020 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Engineering, research and development $ 217 13.8 % $ 285 16.9 % $ (68 ) (23.9 )% Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities. Our R&D team focuses both on internal design development, as well as design development aimed at addressing customer design challenges, in order to develop our HMI solutions. Our engineering and R&D costs were down for the three months ended March 31, 2021 when compared with the prior year because we reduced costs and headcount at our Singapore R&D center during 2020 as part of the transfer of the lab to Camarillo, California. Three months ended March31, 2021 2020 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands, except percentages) Selling, general and administrative $ 717 45.7 % $ 746 44.1 % $ (29 ) (3.9 )% Selling, general and administrative expenses consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses. Selling, general and administrative expenses decreased during the three months ended March 31, 2021 as compared with the prior year due to recording forgiveness of the $186 thousand PPP loan, offset by increases in sales, marketing, finance and administrative personnel, and an increase in legal costs and filing fees associated with relisting with Nasdaq during the quarter. Three months ended March 31, 2021 2020 Amount % of Pre-tax Income Amount % of Pre-tax Income Change % Change (in thousands, except percentages) Income tax expense (benefit) $ (7 ) 14.0 % $ (48 ) (72.7 )% $ 41 nm % Income tax expense (benefit) reflects statutory tax rates in the jurisdictions that we operate adjusted for normal book/tax differences. The tax benefit for the three month periods ended March 31, 2021 and 2020 was a result of operating losses for the quarters. 21 Our effective tax rate is directly affected by the relative proportions of income before taxes in the jurisdictions in which we operate. Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate to remain lower than the U.S. statutory rate primarily due to a significant portion of our earnings originating in lower rate foreign jurisdictions. Discrete tax events may cause our effective rate to fluctuate on a quarterly basis. Certain events, including, for example, acquisitions and other business changes, which are difficult to predict, may also cause our effective tax rate to fluctuate. We are subject to changing tax laws, regulations, and interpretations in multiple jurisdictions. Continued corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Additional changes to the tax system in the U.S. could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities. Liquidity and Capital Resources Cash requirements for working capital and capital expenditures have been funded from cash balances on hand and cash generated from operations. As of March 31, 2021, we had cash and cash equivalents of $6.1 million, working capital of $7.5 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as of March 31, 2021. Of the $6.1 million of cash balances on hand, $1.7 million was held by foreign subsidiaries. If these funds are needed for our operations in the U.S., we have several methods to repatriate without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income. Other distributions may require us to incur U.S. or foreign taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate cash to fund our U.S. operations. During the second quarter of 2020, the Company received a loan from Silicon Valley Bank in the aggregate principal amount of $186 thousand pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan was evidenced by a promissory note, dated April 21, 2020, issued by us to the lender, which was scheduled to mature on April 20, 2022, and bore interest at a rate of 1.00% per annum. Proceeds from the loan were used to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire amount of principal and accrued interest was eligible to be forgiven to the extent loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. The full amount of the loan principal and interest was forgiven in February 2021. We believe that our existing cash and cash equivalents balance will be sufficient to maintain our current operations considering our current financial condition, obligations, and other expected cash flows. If our circumstances change, however, we may require additional cash. If we require additional cash, we may attempt to raise additional capital through equity, equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we could be subject to fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to raise additional needed funds, we may also take measures to reduce expenses to offset any shortfall. 22 Cash Flow Analysis Our cash flows from operating, investing and financing activities are summarized as follows: Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by (used in) operating activities $ (1 ) $ 263 Net cash used in investing activities (12 ) (34 ) Net cash provided by financing activities — — Net Cash Provided by Operating Activities For the three months ended March 31, 2021, the $1 thousand of cash used in operating activities was attributable to net loss of $43 thousand, adjusted for non-cash charges of $136 thousand, non-cash gain on forgiveness of PPP loan of $186 thousand, and cash provided by changes in operating assets and liabilities of $92 thousand. For the three months ended March 31, 2020, the $263 thousand of cash provided by operating activities was attributable to net loss of $18 thousand, adjusted for non-cash charges of $142 thousand, and cash provided by changes in operating assets and liabilities of $139 thousand. Accounts receivable decreased from $1,113 thousand at December 31, 2020 to $970 thousand at March 31, 2021 due to lower shipments during the first quarter of 2021 compared to the fourth quarter of 2020. Many of our customers pay promptly and accounts receivable is generally related to the most recent shipments. Inventories increased from $866 thousand at December 31, 2020 to $881 thousand at March 31, 2021. Inventory balances fluctuate depending on the timing of materials purchases and product shipments. Prepaid expenses and other current assets decreased from $392 thousand at December 31, 2020 to $337 thousand at March 31, 2021, and accounts payable and accrued liabilities increased from $578 thousand at December 31, 2020 to $581 thousand at March 31, 2021, primarily due to the timing of payment for purchases of materials and other services provided. Net Cash Used in Investing Activities Net cash used in investing activities of $12 thousand for the three months ended March 31, 2021 consisted purchases of property, plant, and equipment. Net cash used in investing activities of $34 thousand for the three months ended March 31, 2020 consisted of legal costs related to securing patents on new products and processes developed thereunder. Net Cash Provided by Financing Activities There was no cash provided by or used in financing activities during the three months ended March 31, 2021 and 2020. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable.